encryption economy trio performance: CPI

As more and more people gradually realize this, the world moves one step closer to a more stable and balanced economic system.

Written by: Musol

On the night of the release of May’s CPI in June, global investors held their breath as the US May CPI data was finally revealed. The core CPI rose 0.3% month-on-month and dropped to 2.9% year-on-year, basically in line with market expectations. The release of this key data provided a relatively clear direction for the persistently volatile market. After the data was released, readers with a good memory would surely recall that BTC responded immediately with a rise, breaking through the $110,000 mark the next morning, just one step away from the historical high of $111,980 set in May~~ (although it is now already at $120,000) ~~. Interest rate cut expectations have strengthened again, becoming a key factor driving market sentiment, and market sentiment has notably improved, with mainstream coins like ETH and SOL rising by 3%–7%.

If readers have been paying continuous attention to the market in recent years, they should be familiar with the CPI, having seen it several times. Many social media platforms or KOLs have listed CPI as one of the important data points that must be monitored. But why do we need to pay attention to CPI when investing in the crypto market? What is the relationship between cryptocurrency and the CPI in the U.S.? Why does the price fluctuate every time the CPI is announced? Why does CPI play a second or third movement in both the macroeconomy and the crypto market?

What is CPI?

Consumer Price Index, abbreviated as CPI, is an indicator used to measure the price levels and inflation.

Inflation = Currency inflation, currency refers to money, and currency inflation refers to the rise in prices.

For example - we often feel that the prices of many things are rising, with the price of hamburgers at breakfast shops increasing from 15 yuan to 35 yuan, and beef noodles from 8 yuan per bowl to 14 yuan. This is a noticeable inflation, but when the national government needs to assess the overall inflation situation, more complete and comprehensive data is required, and this is when the CPI is used.

How is CPI Calculated?

For example, in a simplified situation:

Assuming there are only three things in the world: clothes, bread, and toys, and assuming they all have the same weight, with last year as the base period, the CPI for the base period is set at 100.

Last year’s prices: Clothes $100, Bread $80, Toys $150

This year’s prices: Clothes $110, Bread $85, Toys $180

This year’s CPI = (This year’s total price (110+85+180) / Last year’s total price (100+80+150)) x 100 = 113.63

The benchmark CPI last year was 100, and this year it is 113.63. The year-on-year CPI = (113.63 - 100) / 100 = 13.63%

In reality, it is certainly much more complicated. There are not just three types of things in the world, but thousands and tens of thousands of them, each with its own categories, prices, and consumption quantities. The actual calculations will have weighted parameters. In short, it can be understood as a basket of price indicators in the consumer market. If the CPI increases, although the prices of individual goods may rise or fall, overall, prices are rising.

So what other CPI-related indicators are there?

There are several indices related to prices, with the CPI (Consumer Price Index) being the index for the prices of goods purchased by consumers, and the PPI (Producer Price Index) being the index for the cost prices of raw materials purchased by producers. Since costs usually reflect in prices, the PPI can be seen as a leading indicator of the CPI, and the trend usually precedes the CPI.

Additionally, there is the core CPI, which is conceptually similar to the CPI but excludes the prices of food and energy. The reason for excluding food and energy is that the prices of these two are more easily affected by short-term factors such as seasonality, weather, disasters, and geopolitical issues. By excluding them, we can obtain data that better reflects long-term trends.

The above mentioned are actually basic concepts, different countries’ governments may have slight differences in defining standards.

In summary, CPI, core CPI, and PPI are all price indicators that can be used to assess inflation.

But what is the relationship between prices and the cryptocurrency market?

Why does CPI affect the cryptocurrency market?

Conclusion first: Because inflation will affect interest rate cuts, interest rate cuts will affect funds, and funds will affect the market, which means the price trends of BTC and other coins.

Everyone can recall the pandemic (many readers might still be attending online classes) — during the pandemic, global funds were essentially flooding the market. This flooding led to inflation, and in order to control inflation, interest rates began to rise.

The CPI trend chart of the United States over the past thirty years, with the years after 2020 circled on the right, inflation is the highest it has been in over thirty years. What happened?

In 2020, the outbreak of the COVID-19 pandemic prompted countries around the world to take measures to respond to this huge impact, one of which was the initiation of global “money printing”. Interest rate cuts + QE (Quantitative Easing = printing money) injected liquidity into the market, this wave of capital frenzy drove up risk assets significantly. Globally, whether in the stock market, real estate, or cryptocurrency, prices soared, which was also one of the background factors of the last bull market (2020-2021).

As can be seen from the chart, the global capital reached a new high after 2020, and the annual growth rate is the highest in this decade.

The cost of massive money printing is inflation. A large amount of money is poured into the market, causing nearly all prices to rise. Inflation in the United States has reached a multi-decade high. After the COVID-19 pandemic began to ease, in order to control inflation, the FED gradually stopped QE and also started to raise interest rates.

The above chart shows the U.S. benchmark interest rates. After 2020, the benchmark interest rates quickly fell to a level close to zero, and in the following years, there were rapid increases in interest rates, making the benchmark rates the highest in over a decade.

The interest rate can be simply understood as the price of money. The higher the interest rate, the higher the price of money, which will be reflected in several aspects:

The cost of capital for enterprises

The higher the interest rate, the higher the capital cost for enterprises, making them more cautious in investment or turnover, and spending will be more careful.

Evaluation Criteria for Venture Capital Investment

If putting money in a bank fixed deposit yields 5%, would you still want to buy stocks without high dividends? The benchmark interest rate is just that high, and if DeFi cannot provide annual returns of tens to hundreds of percent, it will be difficult to attract people to use it.

Liquidity in the Capital Market

As money becomes more expensive and costs rise, it will be less likely to be released, leading to a decrease in overall market liquidity. The reduction in liquidity will also result in a decrease in trading willingness, among other effects.

In other words, unless the economy is very good, long-term high interest rates could cause certain problems, potentially leading to a decrease in corporate investment willingness, a lack of interest in risk markets, depletion of market liquidity, and so on, affecting the real economy and causing an economic downturn.

So why does the FED need to raise interest rates so high and maintain them for so long?

To combat inflation.

FED Inflation Target: 2% - Already Very Close to the Target

Inflation is also an important factor that can affect the economy, and controlling inflation is one of the most important tasks of the FED.

Federal Reserve Chairman Powell has stated multiple times that the long-term goal is to reduce inflation to 2% (CPI annual growth rate), which is the red line in the chart and currently appears to be very close.

Latest US CPI data for June 2025

Although there is still a bit of distance from the 2%, FED Chairman Powell has stated that the target of 2% remains unchanged, but the strategy can be flexible in response, as long as inflation is controllable and moving towards the target. To avoid affecting economic development, the possibility of an early interest rate cut cannot be ruled out.

The premise is that inflation is controllable and progressing towards the target, without recurring signs of warming.

The reason to pay attention to the U.S. CPI data is that it is an important factor affecting whether the Federal Reserve will cut interest rates, but how does a rate cut relate to cryptocurrencies?

Key Factors for a Bull Market in the Cryptocurrency Sector: Capital

Please see the picture:

The three red dots indicate the times of Bitcoin’s past three halvings. Each time after the halving, a halving market followed, which is one of the reasons many people are looking forward to the bull market in 2024: Bitcoin’s fourth halving will take place in April 2024. However, have you noticed that the past three halvings all occurred in a low interest rate environment, with the benchmark interest rate being below 1% during those times? The current benchmark interest rate is above 5.25%.

The first three black dots represent the past three halvings, corresponding to the M2 year-on-year growth rates of the four major central banks, which were all much higher than now. From the last bull market to now, the M2 of the four major central banks has hardly increased.

It has been mentioned that funds are a key factor influencing the cryptocurrency bull market. In simple terms, more funds need to enter the cryptocurrency market to drive the overall market up. Spot ETFs can also bring funds into the market, while interest rate cuts are a more macro factor that can affect the overall amount of funds in the environment. With more funds and greater liquidity, risk assets have a better chance of performing well.

At the same time, there is an important factor that will mainly affect the DeFi sector. If the benchmark interest rate is already high, why would people take on risks to seek risk profits? A high benchmark interest rate will stifle this part of the financial yield market. If DeFi cannot provide higher attractive annualized returns, people’s willingness to participate will decline, leading to a decrease in TVL, which further worsens DeFi yield, creating a vicious cycle.

For the DeFi sector, which focuses on financial returns, a low interest rate environment is more favorable for industry development. Of course, low interest rates may also lead to bubbles, and this part of the market needs to find balance in dynamism.

In summary, a bull market requires capital, and a frenzied bull market definitely needs substantial capital support. The most important event affecting overall capital at this stage is the interest rate cut in the United States, which is almost a prerequisite for a raging bull market in the crypto world.

Let’s first take a break from CPI and briefly discuss what inflation is.

Why is the Consumer Price Index (CPI) considered a fraud?

Inflation refers to the phenomenon where the general price level rises over a period of time, leading to a decrease in the purchasing power of currency. This means that the same amount of money buys less than it did before, so people need to spend more money to purchase the same goods and services. Inflation is typically quantified and measured on an annual basis.

CPI is the most commonly cited method for measuring inflation, and it is typically measured on an annual basis. However, while the CPI often underestimates the true growth of price levels that affect the economy, it remains the most widely used reference point for inflation. When people say “inflation increased by [x]%”, they are almost always referring to the CPI measurement released by the U.S. Bureau of Labor Statistics (BLS).

Although the CPI indeed tracks a basket of goods and prices, this basket is not static, and the weights of various goods change over time. However, the fundamental reason why the CPI underestimates inflation is related to the following fact: consumers’ purchasing power is a necessary input for this method, and the overall level of consumption serves as a self-referential rule for CPI calculation. The CPI is closely tied to changes in the U.S. credit system (growth or contraction), which is controlled and managed by the Federal Reserve, rather than being related to price changes of individual goods. Just as the basket of goods included in the CPI (and the weights of individual goods) changes over time, because consumers cannot keep up with actual inflation (the gap between wage changes and the rising cost of living), this is precisely the reason that first drives the substitution for lower-quality goods - that is, the changes in the basket of goods and the changes in the weights of individual goods.

To put it more simply, consumers cannot spend money they do not have. The single most significant factor affecting the overall level of spending (and price levels) is changes in the money supply, which determines the total scale of the U.S. credit system. For example, in the past 12 months, the Federal Reserve has caused the broad money supply to decline by about $800 billion, which corresponds to a 3.7% drop in all deposits in the system. This has had the greatest impact on overall spending and price levels in the entire economy. It acts as a regulator of reported CPI inflation. According to CPI measurements, inflation is still rising on an annual basis, but when measuring individual necessities, the CPI measurement is not as high as the actual inflation levels. In other words, it is surprising that while the money supply is actually contracting, the manipulated and understated CPI inflation measurement continues to rise, but the contraction of money also makes the real (higher) inflation levels more painful.

This theme actually reminds me of “Rich Men North of Richmond,” which is undoubtedly related to the creative roots of the song “Rich Men North of Richmond,” a song that suddenly became the most popular in America overnight: “Your dollars are worthless, and they are being taxed endlessly.” — this is a fact that resonates with people across the country. I believe it has been able to do this because it connects the reality of people feeling suffocated by the American economy with political corruption. Whether people associate it with the Federal Reserve or elected politicians, it addresses the entire broken system. It’s not about Democrats or Republicans, not Jerome Powell, nor Janet Yellen or Ben Bernanke. This system is broken, and the notion that the cost of living is moving in the wrong direction is an extremely serious part of the psyche.

Another reality is that a song cannot change anyone’s life circumstances. When people wake up on Monday morning, a song cannot solve any problems. Knowing that people across the country share similar anxieties may provide a sense of catharsis, but it can only accurately describe the current situation. It cannot force politicians out of office, miraculously end the Federal Reserve, or prevent people like Paul Krugman from making foolish and untimely statements. The economic structure has broken down, and its fundamental problem lies in the centralization of the money supply. Bitcoin may be the only way out, as it addresses the root problems that led to the breakdown of the current economic system. It fixes money. The centralization of the money supply and the ability to create money are the root causes of the problem. It is the source of inflation, and worse, it has led to the breakdown of the entire economic structure.

Although Bitcoin is just a tool, it is indeed a tool that can be used to address the root cause of inflation. We can see that the Federal Reserve can continue to print dollars, but they cannot print our “money” - the Federal Reserve cannot print Bitcoin. Congress can continue to spend dollars they do not have (mainly because the Federal Reserve creates more dollars), but they cannot spend Bitcoin they do not have. A new car can solve the problem of a bad car, a new home can help solve the problem of a dilapidated house. A gym can help address the issue of body shape (to some extent), but only a better form of currency can solve the problem of currency breakdown.

The problem will not solve itself; the only way out is to go through the storm (not around it). Just because there is no simple solution, and no obvious solution for most people, does not mean that the solution is not very logical. Inflation is caused by printing money, and “the right to indiscriminately increase the money supply” means stopping anyone from arbitrarily increasing the amount of money, which is one of the roles of Bitcoin. Broader solutions (and a more stable economic structure) are rooted in each individual’s decision to opt-out and the cumulative effect of each person finding solutions one by one, where everyone has the incentive to solve the inflation problem for themselves, and no one else can be blamed for inaction.

Inflation is actually never absolutely measured by an exact number, and it has not decreased. Since 2008, the Federal Reserve has increased the supply of base money by 9 to 10 times (an increase of 8 trillion dollars). During the same period, the broad money supply (which is M2) has tripled (an increase of 14 trillion dollars). The inflation of commodity prices is only just beginning to catch up with the historical surge in money supply. In response to the continuously rising inflation, the Federal Reserve quickly, significantly, and artificially raised interest rates (starting around March 2022). The actions of the Federal Reserve directly led to the collapse of many banks, and the same issues still exist and lurk underground. But more fundamentally, rising interest rates do not make food and energy more abundant or cheaper—in fact, the opposite is true. More problems will erupt, ultimately leading to the printing of more money and more inflation—the prevalence of money printing will logically and ultimately manifest as a superinflation of inflation.

But hyperinflation is not the end of the world; hyperinflation of fiat currency is a reasonable and logical response to governments and central banks creating money out of thin air. Bitcoin is the other side of the same coin, perhaps the light at the end of the tunnel. Maybe it is like this: there is currently a five-alarm fire, but the solution to completely extinguish it is at hand. It may not cure all the problems in the world, but solving the monetary issue will fix the foundation of the economic structure.

As more and more people gradually recognize this, the world moves one step closer to a more stable and balanced economic system.

I『ve been selling my soul，

I sold my soul,

Working all day，

Working day and night,

Overtime hours，

Ongoing overtime,

For bullshit pay，

Only for a few pieces of broken silver.